Its share price is up by a third since September at a five-month high, but some key numbers have worsened recently. Our head of markets talks through this year-end update.
While the outlook might be deteriorating, Taylor Wimpey can consider the job done in 2022, despite the economic wobbles which followed the disastrous mini-budget in September. The group expects full-year profit to be in line with its previous expectations, and at the same time will report an improvement to operating margin, driven partly by a 6% increase in UK average selling prices to £352,000.
However, as the year wore on, the warning lights began to flash red. The net private reservation rate per week dropped to 0.68 from 0.91 for the year, but in the second half fell to 0.48. Similarly, a cancellation rate for the year of 18% compared to 14% the year previous, but ominously rose to 23% in the second half.
As such, Taylor Wimpey’s year-end order book was valued at £1.9 billion, a noticeable decline from the previous £2.55 billion. More broadly, rising mortgage rates, build cost inflation, ongoing supply chain issues and planning permission delays all add to the headwinds facing the sector. While house prices might have cooled for the time being, potential buyers are clearly taking more of a wait-and-see approach before entering what is probably the largest financial commitment they will make.
There are some positives, however. The group’s decision to scale back on land purchases by becoming much more selective resulted in a year-end net cash position of £864 million, as compared to the £800 million they had previously expected, without affecting its substantial land bank which can be kept in reserve.
This will not only give Taylor Wimpey some flexibility in tackling the more pressing issues ahead, but it should also enable the continuation of shareholder returns, although perhaps not quite at the present level. It may be that the current dividend yield of 8% may be a step too far to guarantee for its income-hungry investors, although a significant cut is not expected.
At the same time, housebuilders are in a classic cyclical sector and have been in this situation before. Indeed, following the financial crisis in 2008, most of them emerged in better shape, not only through cutting their financial cloth to suit the conditions, but also going on to buy land aggressively at reduced prices. This in turn led to higher margins, profits and of course shareholder returns.
Unfortunately, this is not where the housebuilders find themselves at present and they recognise the likely difficulties this year will bring. It also remains to be seen whether the dark outlook is fully factored into share prices in a sector which has borne the brunt of UK economic pessimism over the last year.
For its part, Taylor Wimpey has seen a share price decline of 30% over the last year, as compared to a gain of 3% for the wider FTSE 100 index. The drop is not as severe as some of its peers, and a more recent hike of 30% over the last three months could signal a changing fortune, even if the ride will remain volatile.
On balance, and with eyes looking towards the medium to longer term future for the housebuilders, the market consensus remains positive for Taylor Wimpey, and continues to come in at a 'buy'.
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